Why was Winterfell burning? The 500 men outside the walls were there to liberate the town. The sailors went back to their land with the guy. Even if there was a battle between them it was 500vs25 or so. Why would the entire town be burning and destroyed?

The residents should have been pretty happy about their liberation so would they even resist and fight them?

We don't know much about the man sent to liberate Winterfell, but keep in mind what we know about his father (Roose Bolton). He brought up the idea of torturing prisoners (via flaying) as casually as you or I might ask for some wine.